Long Midwest: The Region’s Time to Thrive
The Midwest is perfectly positioned to survive a venture capital market ‘reset’
Long overlooked and under-hyped, the powerhouse Midwest¹ economy has seen a renaissance the past few years. From the regional hub and megatropolis Chicago (12+ new unicorns minted in 2021 — check out feature stories here and here and here) to state tech beacons Columbus, Pittsburgh and Kansas City to collegetowns Madison, Ann Arbor and Columbia, the region is producing unicorn after unicorn. But what’s unique about these companies (and the bumper crop of Seed to Series B companies right behind them) is that — in general — they are way better positioned to survive and thrive in a capital market downturn than their coastal peers.
Why is that the case? Let me lay out several clear reasons:
- The Midwest is more capital efficient than its coastal peers, with lower burn rates and stronger unit economics than coastal startups with similar revenues. This has always been the case, due to two primary factors:
- The cost of doing business is much lower. From lower rents to lower labor costs to lower taxes, being based in the Midwest has a direct impact on the bottom line.
- It has long been harder for regional startups to raise capital, so these companies have had to demonstrate the same rapid growth rates with a fraction of the capital that a coastal startup at the same stage would have raised.
2. Midwest startups sell into a broader cross-section of the US economy, including a diverse segment of the Fortune 500, so they don’t rely solely on other software companies / venture-backed tech companies. Even our seed-stage startups have major customers like AbbVie, Anheuser-Busch, Anthem, Ford, P&G and Target — not just venture-fueled startups from the same YC batch. These customers have survived recession after recession, and won’t stop paying their bills when SaaS multiples decline and the VC dollars slow down.
3. Valuations for Midwest-HQed startups reflect valuation discipline from the start, minimizing impact of a correction. As I mentioned in point 1b, it essentially took twice the revenue for a Midwest startup to get the same valuation as a coastal startup. If Silicon Valley startups were getting 100x in 2021, Midwest startups were lucky to get 50x. While the reset may have set many startups back, the Midwest cohort can grow into the ‘new normal’ 7–12 months faster (holding growth rate constant). This will allow these Midwest companies to raise again earlier and avoid losing talent due to layoffs or churn employees that received options in the most recent round (a la Instacart’s painful fix).
4. The Midwest has its strengths across several industries, including healthcare, transportation/logistics, food & ag, manufacturing insurance, enterprise software and consumer products/retail. As a result, damage to one sector will have limited regional impact, creating more resilient companies — the same cannot be said for the entertainment industry in LA, life sciences in Boston or software in Silicon Valley. This is particularly important for horizontal B2B software / infrastructure and any consumer business, as a downturn in spending in one area won’t materially impact company sales, employee quality of life and consumer spending.
Clearly, we’re biased — we’ve backed 130 Midwest-headquartered startups since 2015 — but we’re also experts on the subject and have had dozens and dozens of conversations with our portfolio over the past few months. The feeling on the ground is that this is the Midwest tech economy’s time to shine. We’ve never seen this much interest in our portfolio — often from larger coastal investors seeking “capital efficient” startups that still have incredible growth stories. Stories like Rheaply, MVMNT, APFusion, 86 Repairs, Authenticx — and the list goes on :)
¹We feel the Midwest is more than just the 12 states defined in the US census, and — for cultural, economic, geographical and historical arguments that we partially outlined here — we include the western half of Pennsylvania and the state of Kentucky in our investment range (check out these surveys on FiveThirtyEight and CityLab).
About M25: M25 is an early-stage venture firm based in Chicago, investing solely in tech startups headquartered in the Midwest. Since launching in 2015, M25 has become the most active investor in the region, quickly becoming the preferred seed investor for the next generation of Midwest unicorns. Portfolio companies include Kin Insurance, Loop Returns, Astronomer, Summersalt, SteadyMD, Branch, MVMNT, and more. For more information, please visit www.m25vc.com.
